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FRASERS Logistics and Commercial Trust (FLCT : BUOU 0%) is acquiring an 89.9 per cent interest in four logistics assets in Germany from its sponsor, Frasers Property : TQ5 0%.

 

On Friday (Mar 15), FLCT said the agreed property purchase price of 129.5 million euros (S$173.1 million) represents a discount of 5.3 per cent to the assets&rsquo appraised value by Colliers, and a 1.1 per cent discount to the value as appraised by CBRE.

 

The acquisition is expected to be distribution per unit and net asset value accretive to the real estate investment trust (Reit).

 

After adjusting for Frasers Property&rsquo s equity interests in the companies that hold the properties and accounting for inter-company loans, the purchase consideration comes in at around 118.7 million euros.

 

FLCT intends to fund the transaction, which is expected to complete by end-March, through external debt financing.

 

Upon completion of the acquisition, FLCT&rsquo s portfolio occupancy would increase to 95.9 per cent as at end-2023, while its logistics and industrial portfolio would remain at full occupancy.

 

Its overall portfolio weighted average lease expiry (Wale) would be unchanged at 4.4 years.

 

Frasers Property said in its own announcement on the same day that it planned to use net proceeds from the sale for working capital purposes, including repaying and servicing borrowings.

 

It added that the divestment was in line with its capital recycling strategy, which would enable Frasers Property to both optimise capital productivity and support the growth of its Reits.

 

The properties in Germany comprise four buildings with a total gross net lettable area amounting to 72,422 square metres as at end-2023.

 

Noting the assets&rsquo Wale of 6.1 years and consumer price-linked indexation incorporated in the leases, FLCT&rsquo s manager said the Reit would benefit from rent escalation by acquiring the properties.

 

Three of the assets &ndash located in Egelsbach, Saarwellingen and Uberherrn &ndash are freehold and are within the &ldquo Blue Banana&rdquo region in Europe, which has a population of around 110 million.

 

Another leasehold asset in Hamburg is situated close to the Port of Hamburg.

 

Anthea Lee, chief executive of FLCT&rsquo s manager, said the acquisition of these properties comes as the Reit increases its proportion of logistics and industrial assets in its portfolio.

 

&ldquo The proposed acquisition demonstrates FLCT&rsquo s ability to tap on our sponsor&rsquo s pipeline and this deal size enables the manager to execute the transaction in a timely manner to secure additional income streams from the logistics and industrial sector,&rdquo she said.

 

Citi Research analyst Brandon Lee has kept &ldquo buy&rdquo on Frasers Logistics & Commercial Trust BUOU -1.82% (FLCT) with a lower target price of $1.24 from $1.48 previously.

 

To reflect revised foreign exchange assumptions, lower occupancies mainly in UK business parks and higher debt cost, Lee has cut his FY2024 and FY2025 distribution per unit (DPU) estimates by 8.4% to 6.88 cents and 7.16 cents respectively. The analyst has also introduced FY2026 DPU estimate of 7.55 cents. 

 

Lee also highlights several risks specific to the trust that could affect the achievement of Citi&rsquo s target price. First is the cap rate cycle &mdash with industrial cap rates now lower than pre-financial crisis levels and foreign capital consisting of a significant portion of transactional activity, a key risk for the sector is diminishing relative attractiveness of industrial yields. 

There are also concentration risks. FLCT&rsquo s top tenants account for about a quarter of its gross rental income. With the top 10 tenants each accounting for between 1% to 5% of its gross rents, the fallout of any one would have a more noticeable impact on FLCT&rsquo s distributions. 

 

Additionally, while FLCT has fully-fledged its distributable income, unfavourable exchange rate movements beyond that horizon could adversely affect the actualised value to investors. Lastly, lack of clear synergies with its office and business park acquisitions could result in higher trading yields, Lee notes.